Chips all in: Broadcom offers $103 billion for Qualcomm

Monday

Nov 6, 2017 at 1:55 PMNov 6, 2017 at 2:39 PM

By Michael J. de la MercedThe New York Times

Broadcom on Monday unveiled a $105 billion takeover bid for Qualcomm, the biggest such effort ever in the technology industry and a prelude to a potential merger battle between two of the world’s biggest chip makers.

On one side is Qualcomm, a longtime leader in the semiconductor industry that has fallen on hard times, facing a protracted legal battle with Apple and an antitrust investigation in Europe. On the other side is Broadcom, which has grown enormously over the past eight years thanks to voracious deal-making.

Putting the two together would yield an undisputed giant in the world of smartphone technology — a company whose chips are used in both the latest iPhones and the newest Android models. But the offer faces several hurdles, including potential opposition from government regulators on competition issues and, given that Broadcom is currently based in Singapore, national security.

That it is Broadcom bidding for Qualcomm reflects each company’s changing fortunes over the past decade.

Qualcomm, an early pioneer in cellphone chip technology, has seen its stock price fall around 20 percent in the past 12 months, before the Broadcom bid was reported. It has also been embroiled in a fight with Apple, suing the iPhone maker last week over accusations of software violation agreements. Apple itself sued Qualcomm this summer over what the smartphone maker said was an “illegal business model.”

By contrast, Broadcom, whose roots extend to a former a division of Hewlett-Packard, has grown by leaps and bounds. The company traces its leadership to Avago Technologies, which went public in 2009 after years of ownership by Silver Lake and KKR. Its chief executive, Hock Tan, spearheaded a series of ever-bigger deals, culminating two years ago with the $37 billion takeover of Broadcom.

After that deal, Avago took on Broadcom’s name — but hung on to its dreams of becoming even bigger.

Qualcomm, whose wireless chips and patents touch nearly every smartphone in the world, is Broadcom’s most formidable quarry yet.

Under the terms of the offer, Broadcom is offering $70 a share, representing a 28 percent premium to Qualcomm’s closing stock price on Thursday, the day before reports about the bid emerged. As part of the deal, Silver Lake, the investment firm that has backed Broadcom for 12 years, has agreed to provide $5 billion in convertible debt to help finance the proposed transaction.

Qualcomm is likely to quickly reject the bid, believing that it dramatically undervalues the company. It is trying to close its own big acquisition, the $38.5 billion takeover of NXP Semiconductor, a chip maker whose products are becoming important in the internet-of-things ecosystem. (A condition of Broadcom’s offer is that Qualcomm not raise its offer to NXP beyond its current level of $110 a share.)

In a statement on Monday, Qualcomm said only that it was reviewing the Broadcom proposal.

Shares in Qualcomm traded below Broadcom’s offer as of Monday morning, at $63.83, potentially reflecting skepticism from shareholders that the takeover bid will succeed. Shares in Broadcom were little changed.

Though Tan famously avoids the news media, he took a big step into prominence on Thursday when he appeared with President Trump at the White House to announce that Broadcom would move its legal base to the United States from Singapore. Some analysts have questioned whether that decision was meant to help win political support for a takeover of Qualcomm, which is expected to face tough antitrust scrutiny.

For Qualcomm and its advisers, the biggest issue is likely to be a simple matter of price. Though the company last traded above $70 a share two years ago, its management team believes that the chip maker is poised for a rebound, thanks in part to the NXP acquisition and to a belief that it can prevail in its fight with Apple.

More fundamentally, the company believes that its trove of patents — among the most formidable in the world of wireless networking — remains a hugely valuable asset. And it is betting that it will be able to help define the forthcoming 5G standard for superfast networking.

But investors were unnerved by a report in The Wall Street Journal, citing people familiar with the matter, that Apple was weighing excluding Qualcomm’s chips from next year’s batch of iPhones, relying instead on competing products from the likes of Intel.